What is a Carry Trade Strategy?

We have said a lot about technical strategies for trading. However, we would like to remind you that there is another important part to trading, namely fundamental analysis. If there is fundamental analysis, there must also be a fundamental strategy for trading.

Let’s start with the most common and easy strategy – the Carry Trade strategy.

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This strategy is based on interest rates. In the fundamental analysis education section We already told you that interest rates are a perfect indicator of the state of the economy in every world. This is a fast and precise way to predict which country’s economic growth is stronger, and as a result which currency will strengthen.

Countries with weak economic growth have low-interest rates. This is the central bank’s way of supporting credit growth and allowing cheap money businesses to enter the economies of countries where exchange rates are low. Countries with high economic growth have high GDP growth rates and rising inflation rates, so the central bank must raise interest rates to limit inflation. This method will make the domestic currency exchange rate rise.

The difference in interest rates gives long-term investors the opportunity to make a profit.

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So what is the main idea of ​​the Carry Trade strategy?

The main idea of ​​this strategy is|“buy currency with a high-interest rate and sell currency with low-interest rate.”

Traders borrow currencies that are “low” (with low-interest rates), for example, the Japanese Yen. Then the trader invests in a profitable asset, for example, the Australian Dollar. The yen will be the currency providing funds, while the Australian dollar will be the investment currency. As a result, the flow of capital from the Yen to the Australian dollar will increase, and the demand for the Australian dollar will increase. Keep in mind that flows increase due to risk sentiment, so traders want to invest in profitable but riskier currencies. In the end there was turmoil in AUD/JPY.

Another thing to note is the swap. Swap is a procedure of opening position orders from one day to the next. If a trader extends his order position for more than one day, he will get a profit or loss depending on the fluctuating interest rates.

For example: imagine if the Australian dollar has a higher interest rate than the Japanese Yen, then if you buy AUD/JPY then you will get the difference in the interest rate difference between AUD and JPY or called a swap from the position of the order that you hold until the next day. However, if you sell AUD/JPY, then you have to pay the swap of every position you hold until the next day.

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How to determine the right currency pair for profit?

It is very easy to determine which currency pair provides a good opportunity for you to make a profit. Open MetaTrader, on the left side of the screen it says “Market Watch”.

Click on the currency pair you want to check, as in our example using AUD/JPY then we will click on this currency pair. In the new pop-up screen that appears you will see a line “Specifications”.

In the new pop up screen that appears you will see a line

Click on it and you will see a new window, there you will find “Swap long”. As in the example, AUD/JPY has a small positive swap position for long positions (0.81). This is the first signal.

Then you can check the weekly chart of the currency pair you want to trade. A long uptrend indicates a good signal for trading in the currency pair.

Let’s study an example: on the weekly chart of AUD/JPY, we see an upward trend from early 2000 to early 2008 (when the financial crisis occurred). The fact that the uptrend persisted for 8 years shows that this currency pair is safe for the Carry Trade strategy.

Let’s look at the current state. You must remember that any long uptrend is inconsistent. After the trend ends it is very important to wait until the next trend will be formed. Since January 2016 a new uptrend has started to form, and this is a good signal for trading in this currency pair.

As you can see, it is very easy to find a currency pair that will give you a profit in the long term. The result is the Carry Trade strategy is an easy way to make money. However, you should still pay attention to some of the features of this strategy.

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3 Tips of Foerx Carry Trade

The 3 features of this strategy that you must keep in mind are:

  • This strategy is only useful for long-term trading. As a result, you should know how to work with large timeframes. It is important to know how to distinguish a correction from a currency pair that can last several days from a global trend reversal. This strategy will not give you profit if you are used to actively trading. You have to be patient and believe in your strategy. Open an order position for several months, then you will get a profit.
  • Remember the Carry Trade strategy is a low-risk strategy, so it means that your profit will not be very high (rule: high risk – high profit, low risk – low profit). So if you want to use this strategy and get a big profit, then you have to make a bigger deposit.
  • Don’t forget about fundamental analysis. If you open an order according to this strategy, it doesn’t mean you can leave a trade without your attention. You should still monitor interest rates and the possibility of permanent changes because market expectations of an increase or decrease in interest rates can affect currency values. In addition, there are other factors that can affect the direction of movement of the currency pair. As in our example above: after 8 years of an uptrend, the value of the currency pair fell due to the financial crisis. In that volatile environment, traders start investing in the Japanese Yen (it is a safe-heaven).

The conclusion is that we can say that the Carry Trade strategy is an easy strategy and does not require deep financial knowledge.

All you need is knowledge of the interest rate differential of the currency pair you want to trade.

Even so, you still have to pay attention to the characteristics of this Carry Trade strategy.

If you have the patience to wait a few months to get a profit, then you can try this strategy!

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